Paid Leave and 401(k) Deferrals

[Randy Watson]

Is an employee on paid leave permitted to make 401(k) contributions from that pay? Any comments and/or citation would be appreciated. Thanks.

[oriecat]

What does the plan doc say?

[Randy Watson]

The plan document does not address this issue. Basically I am wondering whether someone on leave is considered an employee since only employees can make deferrals.

[oriecat]

What sort of paid leave do you mean? I find it hard to imagine continuing to pay someone and not still considering them an employee. If they aren't employed still, why would you keep paying them? (But I don't deny that there are situations that my eyes are not open to yet.)

What does the plan doc define for compensation then? Mine basically says anything we pay you and you are taxed on, so any paid leave would apply. Does your definition exclude pay for time not worked, or only include worked time, or some other definition?

[g8r]

Unfortunately, I think there is a lack of guidance on this. As pointed out, a plan must generally be for the benefit of employees. Informally, I think the IRS doesn't have a problem if you let someone defer out of the last paycheck (e.g., person terminates and is paid a week or two later for the last week or so of employment plus unpaid vacation). But, if a person is getting severance pay for a long period of time, the IRS informal position is the person can't defer, even though it is reported on a W-2 and may be included in the plan's definition of compensation (and if the plan excludes comp while not a participant, then it might not even be included at all).

[Randy Watson]

I think the comment on severance is helpful, although I believe our situation is much different considering a person who severs from employment could hardly be considered an employee. How about someone on paid FMLA leave. Can they defer?

[Jon Chambers]

My understanding is that if the "pay" is compensation, then you can defer. If "pay" comes from insurance (e.g., disability insurance), it's not compensation and is therefor not eligible for deferral. This isn't my area, so I may be wrong, or oversimplifying the issue.

[mbozek]

For retention purposes many employers provide employees with sabbiticals or allow them to work at research institutions at employer expense as part of a paid leave program. Employees can be assigned to work for another entity who will reiburse the employer for the cost of the employees services. If these programs are provided as part of the employer-employee relationship then the amount paid will be compensation to the employee includible for contribution to the 401(k) plan.

[QDROphile]

Get a decent plan document. That will take care of the problem.

[Blinky the 3-eyed Fish]

Yeah, your plan document sucks!

http://benefitslink.com/boards/index.php?s...=24269&hl=sucks

[Randy Watson]

I agree. Thanks for the comments.

[QDROphile]

Gee, Blinky, I was trying to be discreet and civilized for a change. But you are right.

[MGB]

What kind of leave?

The IRS is taking the position (actually goes back to some guidance they gave 40 years ago) that "gross ups" to full compensation for employees that are called in to active service is NOT compensation because there was a termination of employment when they were called up. However, they are looking at possibly reversing that stance in new guidance. Currently, you cannot defer out of this pay, although "everyone" does.

[Randy Watson]

MGB, is the IRS position documented anywhere?